GAIL's valuations attractive, says Motilal Oswal; tariff hike key catalyst

Analysts at Motilal Oswal Financial Services (MOFSL) remain upbeat on state-owned Maharatna company GAIL (India), citing attractive valuations and the anticipated transmission tariff revision.

 

The brokerage has reiterated its Buy rating on GAIL, with a sum-of-the-parts (SoTP)-based target price of ₹205, nearly 13 per cent higher than its previous close of ₹178.50 on the BSE.

 

Over FY26-28, Abhishek Nigam and Rishabh Daga, research analysts at MOFSL, estimate a 9 per cent CAGR in PAT, driven by an increase in natural gas transmission volumes to 132 mmscmd in FY28 from 123 mmscmd in FY26, substantial improvement in the etrochemicals segment over FY27-28 as the new petchem capacity becomes operational and spreads bottom out, and healthy profitability in the trading segment, with guided Ebit of at least ₹4,000 crore in FY26/FY27.

 

 

The analysts expect RoE to stabilise at around 12 per cent in FY27/28, supported by healthy free cash flow generation of ₹13,850 crore over FY26-28, which they believe can underpin the company’s valuations.

Tariff hike key catalyst; valuations attractive now

According to MOFSL, GAIL’s valuations have corrected sharply from their September 2024 highs, with the stock now trading close to historical averages at 1.1x one-year forward core P/B. This, coupled with an attractive dividend yield and robust FCF outlook, offers limited downside.

 

“Further, the anticipated transmission tariff revision effective January 2026 is expected to raise FY27 PAT by around 11 per cent, revising our target price to ₹228 per share, serving as a key near-term catalyst,” the analysts wrote in a research note.

 

Transmission volumes are also expected to rebound in FY27 as the impact of multiple one-off disruptions in FY26 wanes, with a recovery in power and fertilizer offtake and normalisation of flood-impacted supplies. “Government initiatives to further rationalise natural gas taxation can be a significant long-term positive,” the analysts added.

Risks remain in LPG segment

However, the analysts cautioned about key risks, particularly APM gas de-allocation in the LPG segment. GAIL’s LPG production has been impacted in recent quarters, with about 25 per cent of domestic gas originally allocated to the division withdrawn, resulting in a corresponding decline in the average production run-rate of LPG and liquid hydrocarbons (LHC). Any additional de-allocation could further weigh on segment performance and profitability.

 

“In FY25, the LPG and LHC segment Ebit accounted for 6.5 per cent of GAIL’s total Ebit. Producing LPG using costlier RLNG is economically unviable, thus limiting flexibility,” the analysts added.